LAST week, Pakistan’s finance chief Shaukat Tarin sought to reassure the markets and people that our economic fundamentals remained strong and the economy continued to progress on the growth path. He added that inflationary pressures crushing the low-middle-income households in recent months were mostly ‘imported’ and transitory. He called for patience for a few months as prices would start to taper soon. Mr Tarin’s hopes are based on the expected reversal in the international commodity cycle, which the government has consistently blamed for soaring domestic prices, the ballooning current account deficit and increasing import costs. But it’s not so simple.
Indeed, the spiral in global commodity markets, especially energy and food inflation, has fed domestic prices significantly. But it is incorrect to entirely blame global inflation for the spike in these prices which had been rising in Pakistan even before international energy and food inflation kicked in on the back of increasing world demand/ supply disruptions during Covid. The government blamed the economic policies of its predecessor while the central bank pointed fingers at supply chain disruptions and administered energy tariffs. Likewise, the current account deficit had remained under control in the last couple of years first because of import suppression under IMF-mandated policies and later due to a steep drop in global energy prices once countries shut down their economies and closed their borders to contain the spread of Covid. The recent decrease in oil prices is again driven by fears of a new virus variant. How long this tapering in international prices will last and how the commodity markets will behave in future is anybody’s guess. The fact is that the government’s blind pursuit of growth for improving its electoral chances in 2023 through expansive fiscal policies and increased money supply in the market are the most dominant factors that are currently driving up domestic prices and expanding the current account gap. Even the growth in export in the last five months owes more to higher global prices than an increase in textiles and other items we have sold to the rest of the world. If the fundamentals of the economy were as strong as Mr Tarin wants us to believe, the economy would not have experienced such inflationary and external shocks. Nor would the government have to accept the harsh conditions of the IMF and Saudi Arabia to get the dollars needed to shore up the country’s depleting forex reserves.
Published in Dawn, December 6th, 2021